A Kenyan commercial bank is close to acquiring another Ugandan credit institution, a top official within the central bank has revealed. African Banking Corporation (ABC) is negotiating to take over Capital Finance Corporation, in what will be the second acquisition of a financial institution in Uganda by a Kenyan bank in less than a year.

“There are negotiations going on for ABC to take over Capital Finance. When the necessary agreement is reached and the two have met our conditions, we shall proceed to give them [ABC] the license,” said the official who did not want to be named.

The structure of the deal and how much it will cost remains under wraps.

ABC’s financial statement ending December 2007, indicates that the bank has assets worth $78.5 million, and made a profit of $2.4 million. Those numbers do not carry that much weight in Kenya’s more developed financial market where banks such as KCB have assets worth billions of dollars, but are big enough to throw Uganda’s bankers in a state of high alert over the growing competition in the banking sector. It is anticipated that ABC is to turn Capital Finance into a commercial bank within the first quarter of 2009 in what should intensify debate over the magnitude of profit repatriation from Uganda’s economy.

The entrance of ABC is seen as a move by the bank to diversify its services in the region. It also comes after a Nigerian bank bought another credit institution, Commercial Microfinance Limited (CMF) and turned it into Global Trust Bank only three months ago.

Capital Finance Corporation is a small player under the credit institution tier, the level just below commercial banks. It has two branches and much of its investments are in the risk free government securities, the Treasury Bills and Bonds.

However, the acquisition of Capital Finance Corporation opens up more space for the entrance of Faulu Uganda into the credit institution tier. The Bank of Uganda official said that Faulu Uganda is in the final stages of transforming itself from a microfinance institution into a credit institution.

“There is a high chance that Faulu will become a credit institution before the end of this year,” the same official said.Faulu had assets worth $9.5 million by the end of last year. Considering its branch network, which skirts through all regions of the country, Faulu has a good chance of becoming the biggest credit institution in Uganda. Faulu’s transformation is a bold move considering that it comes on the back of a difficult year for credit institutions, in which the tier showed strong symptoms of being under heavy stress. That stress, partly the reason behind the voluntarily closure of Karim Hirji’s credit institution, Imperial Investment Finance Limited, in February last year, could have prompted managers of Capital Finance Corporation to raise the white flag.

Just like the other credit institutions, Faulu Uganda will offer loans, time and saving deposit accounts, where withdrawals are structured to adhere to a specific time frame. Faulu will compete with Post Bank Uganda, Mercantile Credit Bank, and, for now, Capital Finance Corporation.

Bank of Uganda recently released a report showing the health of credit institutions in a worrisome form, disclosing numbers that indicate that business was at an all time low. The central bank’s annual report to the year ending June 2008 shows that the assets and the loan portfolio of the credit institutions – key planks in measuring the performance of a financial institution – narrowed to their lowest levels in years.

According to Bank of Uganda’s report, loans to the private sector, which are the most significant area for financial institutions to make money, went down by 75%, compared to a formidable increase of about 23% the previous year. Credit institutions are allowed to lend up to 59% of their deposits, while the set cap for commercial banks is 85%. However, the credit institutions decided to play it safe and stick their funds in the risk free government securities. And while commercial banks spent the year outwitting each other with incentives to lure clients to take up the lucrative mortgage loans, credit institutions finished the year as spectators.

The low figures in this tier are attributed to the upgrading of Housing Finance Limited into a commercial bank mid last year. Housing Finance used to control three quarters of the loan portfolio market among the credit institutions. Its conversion into a commercial bank has exposed the low capacity in the other credit institutions.

“One of them, Housing Finance Company graduated from being a credit institution to a commercial bank. The graduation in turn affected the trends in assets and liabilities conditions of the credit institutions,” according to the report.

Yet despite this poor performance, the central bank, which is the regulator of these institutions, says there is no reason for customers to panic. The 156-page report notes that “During 2007/2008, the overall financial conditions of all the credit institutions continued to be rated satisfactory.”